Federal agencies propose reduced capital requirements for too-big-to-fail banks

Three federal agencies—the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC)—have issued a proposed regulation that would dangerously weaken capital requirements for the largest U.S. banking organizations.

The proposal culminates nearly two decades of efforts by the nation’s $26.1 trillion banking industry to weaken bank capital requirements that were set after the Global Financial Crisis.

The revised banking agencies’ proposals for the Basel III Endgame aim to decrease required capital by an estimated 2.4% to 4.8% for the largest global banks, and try to justify the reduction by claiming capital levels are still significantly higher than those before the 2008 financial crisis.

Critics are not buying it.

“Let’s start with what it doesn’t do: It doesn’t break up the big banks,” said Lisa McCormick, a New Jersey Democrat who has called for anti-trust enforcement to protect consumers from disasters and financial chaos. “Americans should be angered that our political system is serving banks that have complained about being subject to stringent regulatory mandates instead of millions of working-class families who lost their homes.”

“Silicon Valley Bank, Signature Bank, and First Republic Bank all collapsed during the spring of 2023,” said McCormick. “Either these agencies are suffering from mass amnesia, or the Trump administration is trying to sabotage our economy with actions that weaken the dollar, and deregulate banks, cryptocurrencies, digital assets, securities, prediction markets, along with the capital and liquidity requirements.”

The central fight is over regulators forcing banks to hold thicker capital buffers—meaning more shareholder equity and less cheap, risky borrowed cash from deposits and bonds,” said McCormick. “Bank lobbyists scream that this equity is just ‘dead money’—a hoard that wastes resources, strangles lending, and punishes families and businesses who need credit to survive.”

“That argument is intellectually bankrupt,” said McCormick. “Equity is never a idle parking lot; it is the primary fuel for a bank’s loan book.”

“A well-capitalized bank isn’t handcuffed—it’s empowered. It has more permanent, loss-absorbing firepower to underwrite new loans, not less,” said McCormick. “The only thing constraining credit is a bank too fragile to take the risk. Capital doesn’t drain the system; it underpins it.”

Republican Michelle Bowman was the only Federal Reserve Governor member to vote against the sweeping proposals advanced by U.S. banking regulators.

U.S. Senator Elizabeth Warren has fiercely criticized federal banking regulators’ revised capital proposals, viewing them as massive rollbacks.

“After a multi-year lobbying assault to gut modest safeguards on Wall Street risk-taking, big banks can now declare Mission Accomplished,” said Warren. “Today’s proposal grants their every wish. It gives them a green light to fund their risky trading and other activities with reckless amounts of debt, further slashing loss-absorbing capital cushions by tens of billions of dollars.”

“It’ll mean bigger payouts for megabank shareholders and executives, less lending to small businesses and families, and a banking system even more prone to devastating crashes and taxpayer bailouts,” said Warren. “Trump is once again selling out the American people to enrich Wall Street.”

US federal banking regulators issued proposals to significantly revise the risk-based regulatory capital requirements for banks, change the risks that apply to credit exposures, and change the method for calculating the capital surcharge for globally systemically important banking organizations.

The Proposals are intended to be the final phase of the financial regulatory reforms undertaken by the Basel Committee on Banking Supervision (“BCBS”) in response to the Global Financial Crisis (“GFC”).

In 2023, US federal banking regulators issued a proposal to implement Basel III that significantly differed from the internationally agreed-upon BCBS framework and would have significantly increased capital standards. That proposal failed due to widespread opposition by the US Congress, the banking industry, and Federal Reserve Governors.

“The only thing standing between a failing bank, a financial crash, and taxpayer bailouts is the amount of capital banks have to absorb their own losses,” said Dennis Kelleher, president of Better Markets, a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again.

“Yet, the banking agencies are now cutting bank capital levels to as low as just before the 2008 crash, which is why banks failed in 2008-2009 and were bailed out by taxpayers – those bailouts were injections of capital that the banks should have had to prevent their failure in the first place,” said Kelleher. “The banking agencies have not identified a single institution, a single market disruption, or a single historical episode demonstrating that current capital requirements today are excessive and should be cut.  The facts prove that US banks are not over-capitalized, which is the premise of these proposals. Indeed, the evidence shows that they are under-capitalized.”

“That’s why cutting capital at the largest, most dangerous banks in the country is reckless, particularly now when those same banking agencies are engaged in deep, broad, and widespread deregulation of those same banks,” said Kelleher. “As a result, the core pillars of financial stability that protect Main Street families and businesses from Wall Street’s high-risk, profit-maximizing activities are weakened to the point that they will not withstand the inevitable stresses that periodically hit the banking sector, the financial system, and the economy.”

Better Markets filed three comment letters (on the Basel III, GSIB, and standardized approach capital proposals), strongly opposing most elements of the Fed, OCC, and FDIC proposals.

“At the end of 2016, 90% of the American people were poorer by 17%-35% than they were in 2007 because of the economic catastrophe caused by the 2008 crash,” said Kelleher. “That’s no surprise because that crash cost the American people more than $20+ trillion in damages. That’s because these banking agencies failed to require the largest banks in the country to have enough capital before 2008, which would have prevented the crash – and now they are doing it again.” 

“The obvious and clear lessons of both the 2008 financial crash and the 2023 banking failures point in the same direction: strong capital rules protect the economy, protect taxpayers, and protect financial stability while supporting the real economy,” said Kelleher. “The banking agencies must stop putting the interests and profits of Wall Street over the best interests of Main Street Americans, community banks, and small businesses.”